Del. may lose role of haven for bankrupt Panel would require a corporate presence in order to file in state

'The Delaware Killer'

Congressional action sought by creditors

big legal fees deplored

Regulation

January 05, 1998|By BLOOMBERG NEWS

WILMINGTON, Del. -- Delaware's days as a bankruptcy haven may be numbered.

For years, judges and lawyers around the country groused that Delaware got most of the nation's biggest corporate bankruptcies, though few of the companies had plants or offices in the state. The big complaint was that the court gave top executives, who often ran the business into bankruptcy, too much leeway in deciding how to reorganize the company.

Now the grumblers have a potent ally: the National Bankruptcy Review Commission. This blue-ribbon panel of lawyers, judges and law professors has recommended that companies lose the right to file for bankruptcy in states where they are incorporated but don't have any operations.

"This is clearly directed at Delaware," said Lynn Lopucki, a Harvard Law School professor who studied how companies shop around for courts that tend to favor management when filing for bankruptcy. "That's the bottom line."

If passed by Congress, the proposal -- nicknamed "The Delaware Killer" in legal circles -- would take a bite out of the number of bankruptcies filed in the state.

Of course, criticism of Delaware may amount to little more than professional envy, some experts say.

"Judges and lawyers in other states don't think they are getting enough of the big, meaty cases," said Alesia Ranney-Marinelli, a New York bankruptcy lawyer who practices in Delaware.

Delaware, corporate home of a majority of the largest U.S. companies, has one of the nation's busiest bankruptcy courts. According to one study, the state in 1996 snared 86 percent of the nation's bankruptcy filings by public companies listing $190 million or more in assets.

There was more of the same last year. Among the biggest bankruptcies was Montgomery Ward & Co., with $3.6 billion in liabilities. It filed in July for Chapter 11, which gives a company protection from creditor claims while it devises a plan to repay debts. The Chicago-based retailer is incorporated in Delaware but has no stores there.

Under existing bankruptcy laws, companies have three options: They can file in the state where they're incorporated, in the state where they have major operations, or the state that's home to their corporate headquarters.

Most big companies pick the first option. More than 60 percent of the Fortune 500 companies are incorporated in Delaware. Also, the state has a tradition of accommodating businesses and their legal problems. And it doesn't hurt that Delaware's judges tend to hustle bankruptcy cases through their courts, Lopucki said.

For example, Rexene Corp., a Texas-based chemicals and plastics company, emerged from Chapter 11 in September 1992, 11 months after it filed for bankruptcy in Delaware.

Delaware's court moves companies through bankruptcy in 10.6 months on average, about half the time of the national average, according to the Delaware Bar Association.

Executives' plans

Another plus -- from a manager's perspective -- is that Delaware's bankruptcy court often accepts executives' turnaround plans over the objections of creditors, said St. Louis bankruptcy lawyer Tom Dewoskin.

And Delaware judges are quick to extend the period during which companies can file reorganization plans -- blocking creditors from making their own proposals, Dewoskin said.

What really got the attention of the bankruptcy reform commission were complaints from small creditors and investors. They say companies across the country flock to Delaware's bankruptcy court, making it hard for them to raise objections to reorganization plans or executive bonuses.

"Filing on the East Coast certainly makes it harder for anyone from St. Louis to get there and sit in on a hearing," Dewoskin said.

While Dewoskin may not be a Delaware fan, plenty of bankruptcy lawyers are, for the simple reason that the state's judges routinely approve legal fees "at the market rates found in places like New York and Los Angeles," Lopucki said. "Many other courts don't do that."

Legal fees in New York run as high as $500 an hour, almost double that of other parts of the country.

Flap over fees

The carping about fees is getting some attention. Helen Balick, Delaware's chief bankruptcy judge, recently killed an automatic pay provision for lawyers in the Marvel Entertainment Group Inc. bankruptcy. The comic-book publisher is in the middle of a legal fight for control and Balick was angry that attorneys haven't come up with a reorganization plan that satisfies lenders and bondholders.

Predictably, Delaware's political leaders plan to fight.

"I cannot comprehend what purpose would be served by diverting cases from a court with such an accomplished record," said U.S. Sen. Joseph R. Biden Jr., a Delaware Democrat on the Senate Judiciary Committee. Biden vows to oppose the commission's recommendation when it comes before the judiciary committee as part of a package of bankruptcy-law reforms.

Shying away

The damage may already be done, though. A new study of bankruptcy cases by Harvard's Lopucki shows the number of big Chapter 11 cases in Delaware last year dropped by half from 1996.

"People may be shying away because of all the publicity about the court's practices," she said.

Balick, who declined to comment, has also paid a price. She was the focus of much of the criticism directed at the court.

U.S. Chief District Judge Joseph Farnan Jr. stripped her last year of the power to hold on to prominent bankruptcies that critics said in some cases should be transferred out of state.

Balick, 62, had an answer to that. She is retiring this month -- making her the first casualty in the attack on Delaware's bankruptcy court.